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More Action Needed To Resolve Problem Loans In The Caribbean

Nov. 01, 2017 2:02 AM ETCUBA
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By Kimberly Beaton, economist in the IMF’s Western Hemisphere Department; and Inci Otker, mission chief for St. Kitts and Nevis and Division Chief of Caribbean III of the Western Hemisphere Department

The global financial crisis and subsequent economic recession saddled banks in the Caribbean with high levels of problem loans. The share of nonperforming loans to total loans more than tripled in many Caribbean countries from 2007 to 2016, and they have been slow to come down. Problem loans (loans that are 90 days or more past due) are bad news for banks and the economy.

Our recent work - to be published in a forthcoming IMF book - looks at the causes and consequences of persistently high levels of problem loans in the Caribbean. We find that the weak economic recovery, deficient legal frameworks, and the lack of distressed loan markets are the most severe obstacles to resolving nonperforming loans in the Caribbean.

A drag on economic activity

The quality of banks’ assets gradually deteriorated during the recession that followed the global financial crisis. The slow recovery globally and in the region left many households and businesses incapable of paying down their loans, leaving banks with high levels of nonperforming assets - mainly personal, construction, and tourism loans.

While there are significant differences across countries, the share of nonperforming loans in total loans peaked between 15–20 percent - up from a pre-crisis average of 5 percent and compared to 3–4 percent in Latin America. While nonperforming loan ratios have started to gradually recede from their peaks in most countries, banks’ slow pace of restructuring, selling, and writing off these loans have delayed their resolution. Banks on average resolved only 16 percent of nonperforming loans in their portfolios in 2013-2015.High nonperforming loans are a drag on economic activity in

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iMFdirect is the policy blog of the International Monetary Fund. Leading economists and officials of the Fund discuss the IMF’s work and advice on economics and finance at a global and a national level.

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